Each year the Internal Revenue Service issues a revenue procedure providing the amount of the Estate and Gift Tax Exemption and the Gift Tax Annual Exclusion (each of which are summarized below) for the upcoming calendar year. For 2023, the current amounts for each taxpayer are:
Estate and Gift Tax Exemption: $12,920,000
Gift Tax Annual Exclusion: $17,000
The publication of this revenue procedure may affect Gould Cooksey clients concerned with the possibility of the imposition of transfer tax liability. While the current Estate and Gift Tax Exemption is at its highest level in its history, current tax law states that it is scheduled to revert to pre-Tax Cuts and Jobs Act amounts beginning in 2026 (i.e., $5,000,000, adjusted for inflation to approximately $6,400,000 for each taxpayer).
[Although not discussed in the above-referenced revenue procedure, the Internal Revenue Code provides that a taxpayer’s generation-skipping transfer (GST) tax exemption is equal to the current tax year’s Estate and Gift Tax Exemption, adjusted for inflation.]
Estate and Gift Tax Exemption
Generally, the Estate and Gift Tax Exemption (sometimes referred to as the “Applicable Exclusion Amount”) is used to determine the aggregate value of the taxable gratuitous transfers a person can make without incurring a tax. In determining this amount, consideration is given to taxable gifts during life as well as taxable dispositions occurring at the taxpayer’s death. Under current law, taxable transfers exceeding the Estate and Gift Tax Exemption are taxed at the rate of 40%.
Gift Tax Annual Exclusion
The Gift Tax Annual Exclusion is the total value of qualifying gifts a donor may exclude from the calculation of the donor’s taxable gifts for an applicable calendar year. This exclusion applies to each donor and is determined separately with reference to each person receiving such gifted property. To utilize the Gift Tax Annual Exclusion, the donor can make a qualifying transfer to each recipient up to this amount each year (i.e., $17,000 in 2023) without using any of the donor’s Estate and Gift Tax Exemption. With the consent of the non-donor spouse, a donor spouse may “split gifts” to allow the donor to gift up to twice this exclusion amount. Generally, to qualify as an annual exclusion gift, the property must be a present interest transfer (e.g., a gift of cash) directly to the recipient (although gifts made in trust and gifts of non-cash assets, such as securities, real property, and closely-held business interests, may qualify as present interest gifts if certain conditions are satisfied).
[If special technical rules are followed, certain transfers in trust may also qualify to exclude transfers subject to GST tax and allow the transferor to preserve available GST tax exemption.]
